Can I Remortgage During a Fixed Term?

Homeowners often consider remortgaging during a fixed-term agreement. While feasible, this decision involves financial considerations and a structured process. Understanding the implications and steps is important.

Understanding Early Repayment Charges

An Early Repayment Charge (ERC) is a fee imposed by a mortgage lender when a borrower repays their mortgage before the end of a specified term, most commonly during a fixed-rate period. Lenders implement these charges to recover expected interest income, which is forfeited if the loan is paid off prematurely. This helps lenders mitigate the financial impact of early mortgage terminations.

ERCs are calculated as a percentage of the outstanding mortgage balance, often ranging from 1% to 5% of the remaining principal. The charge commonly follows a tiered structure, where the percentage decreases as the fixed term progresses. For instance, a mortgage might include a 5% charge in the initial year, reducing to 4% in the second, until it reaches a lower percentage or zero in the final year.

These charges apply throughout the fixed-rate agreement. An ERC is incurred if a borrower refinances with a different lender, sells their property, or switches to a new mortgage product with their current lender outside the existing agreement terms. The precise conditions for an ERC are detailed within the original mortgage agreement.

Many fixed-rate mortgage products include annual overpayment allowances that do not incur an ERC. Borrowers are permitted to overpay a certain percentage of their outstanding balance each year, often around 10%, without penalty. Some mortgage contracts also offer “portability,” allowing the transfer of existing mortgage terms to a new property when moving, which can help avoid an ERC. Understanding these terms is important before remortgaging.

The Remortgaging Process

Considering a remortgage during a fixed term involves distinct preparatory and procedural steps, each requiring careful attention.

Preparatory Steps

Before initiating a new mortgage application, review the current mortgage statement. This document provides details including the outstanding balance, remaining fixed term duration, and specific terms for any Early Repayment Charges. Understanding these details helps calculate the cost of exiting the agreement.

Lenders require a comprehensive set of financial documents to assess a borrower’s eligibility and affordability for a new mortgage. This documentation includes:
Recent pay stubs, W-2 forms, or tax returns for proof of income.
Bank statements, usually covering the last two to three months, to verify income deposits and review spending habits.
Details of existing debts, such as credit card statements or auto loan agreements, to calculate debt-to-income ratios.
A current credit report to evaluate creditworthiness.

With a clear understanding of the current mortgage specifics and personal financial standing, the next step involves researching potential new mortgage products. This research focuses on identifying competitive interest rates, understanding associated product fees like origination or application fees, and determining the Loan-to-Value (LTV) requirements of various lenders. Reviewing the affordability criteria of prospective lenders is also important to ensure new monthly payments are manageable.

Procedural Steps

Once a suitable mortgage product is identified, the formal application process begins. Borrowers can submit applications directly to a bank or credit union, engage the services of a licensed mortgage broker who can access multiple lenders, or utilize online portals provided by various financial institutions. The chosen method depends on personal preference and the complexity of the financial situation.

As part of the underwriting process, the new lender arranges for a professional property valuation. This confirms the property’s market value, which influences the loan amount and Loan-to-Value ratio. The valuation cost is borne by the borrower, and the appraiser provides an independent assessment to the lender.

The legal aspects of transferring a mortgage charge from one lender to another are handled by a solicitor or conveyancer. This legal professional ensures that all necessary documentation is correctly prepared, registered, and exchanged between the parties involved. Their responsibilities include conducting title searches, preparing the new mortgage deed, and arranging for the discharge of the old mortgage and the registration of the new one.

The final stage, completion, occurs when all legal and financial conditions have been met. On the agreed-upon date, new mortgage funds are transferred to the previous lender to pay off the existing loan. The new mortgage officially takes effect, and the borrower begins making payments to the new lender under the new agreement.

Exploring Other Options

When considering changes to a mortgage during a fixed term, several alternatives to a full remortgage may be more suitable or cost-effective.

A product transfer involves switching to a new mortgage deal with the current lender without a full remortgage. This option presents a simpler, faster alternative, as it does not require a new valuation or extensive legal work. Product transfers usually avoid Early Repayment Charges from the existing fixed-rate term, making them a cost-effective choice for borrowers seeking a new rate without changing lenders.

A further advance allows a borrower to obtain additional funds from their existing mortgage lender, secured against their property, without needing to remortgage the entire original loan amount. This can be a suitable option for funding home improvements or other significant expenses while maintaining the current mortgage terms on the primary balance. The further advance portion may come with its own interest rate and repayment terms, separate from the original mortgage.

For homeowners planning to move, some fixed-rate mortgages offer the ability to “port” the existing mortgage to a new property. This means transferring the current interest rate, terms, and conditions of the original mortgage to the new home, avoiding an Early Repayment Charge. The feasibility of porting depends on the specific terms of the mortgage agreement and the new property meeting the lender’s criteria.

A second charge mortgage is a separate loan secured against a property with a primary mortgage. This loan is distinct from the first mortgage and subordinate to it, meaning the first mortgage holder has priority in default. A second charge mortgage can provide additional capital without disturbing the existing fixed-rate primary mortgage, though it comes with higher interest rates due to increased risk for the lender.